Chapter Outline

I)                   Demand, supply and equilibrium in markets for goods and services

A.    Demand for goods and services

    1.      demand and quantity demanded

    2.      the law of demand

    3.      demand schedule and demand curve

B.     Supply of goods and services

    1.      supply and quantity supplied

    2.      the law of supply

    3.      supply schedule and supply curve

C.     Equilibrium – where demand and supply cross

    1.      equilibrium price and equilibrium quantity

    2.      excess supply and excess demand

II)                Shifts in demand and supply for goods and services

A.    The ceteris paribus assumption

B.     An example of a shifting demand curve

C.     Factors that shift demand curves

    1.      normal goods and inferior goods

    2.      substitutes and complements

D.    Summing factors that shift demand

E.     An example of a shift in a supply curve

F.      Factors that shift supply curves

G.    Summing up factors that change supply

 III)              Shifts in equilibrium price and quantity: the four-step process

A.    Good weather for salmon fishing

B.     Seal hunting and new drugs

C.     The interconnections and speed of adjustment in real markets

 IV)             Price ceilings and floors in markets for goods and services

A.    Price ceilings

B.     Price floors

C.     Responses to price controls: many margins for action

    1.      black market

D.    Policy alternatives to price ceiling and price floors

 V)                Supply, demand and efficiency

A.    Consumer surplus, producer surplus and price ceilings

B.     Inefficiency of price floors and price ceilings

    1.      deadweight loss

 VI)             Demand and supply as a social adjustment mechanism

A.    Adjustments occur without government oversight

B.     Demand and Supply answer the Three Basic Questions

Here is my much more complete version.

I.    Markets and Competition

A.   What Is a Market?

          1.   Definition of market:

 B.   What Is Competition?

         1.   Definition of competitive market:

C.   In this chapter, we will assume that markets are perfectly competitive.

          1.   What are the characteristics of a perfectly competitive market:?

2.   Not all goods are sold in a perfectly competitive market.

                 a.   A market with only one seller is called a ?

                 b.   Other markets fall between perfect competition and monopoly. They are called?

 D.   We will start by studying perfect competition.

             1.   Perfectly competitive markets are the easiest to analyze because buyers and sellers take the price as a given.

             2.   Because some degree of competition is present in most markets, many of the lessons that we learn by studying supply and demand under perfect competition apply in more complicated markets.

II.   Demand

         A.   The Demand Curve: The Relationship between Price and Quantity Demanded

                 1.   Definition of quantity demanded:   

    a.   Quantity demanded is negatively related to price. This implies that the demand curve is downward sloping.

                       b.   Definition of law of demand: the claim that, other things being equal, the quantity demanded of a good falls when the price of the good rises.

2.   Definition of demand schedule:

4.   Definition of demand curve:

a.   Price is  drawn on the vertical axis.

                 b.   Quantity demanded is represented on the horizontal axis.

B.   Market Demand versus Individual Demand

1.   The market demand is the horizontal sum of all of the individual demands for a particular good or service.

C.   Shifts in the Demand Curve

a.   An increase in demand is represented by a shift of the demand curve to the right.

b.   A decrease in demand is represented by a shift of the demand curve to the left.

3.   Income

    Definition of normal good:

    Definition of inferior good:

4.   Prices of Related Goods

  Definition of substitutes:

  Definition of complements:

5.   Tastes

              6.   Expectations

         7.   Number of Buyers

III. Supply

A.   The Supply Curve: The Relationship between Price and Quantity Supplied

1.   Definition of quantity supplied:

a.   Quantity supplied is positively related to price. This implies that the supply curve will be upward sloping.

                     b.   Definition of law of supply:

2.   Definition of supply schedule:

3.   Definition of supply curve:

C.   Shifts in the Supply Curve

1.   Because the market supply curve holds other things constant, the supply curve will shift if any of these factors changes.

a.   An increase in supply is represented by a shift of the supply curve to the right.

b.   A decrease in supply is represented by a shift of the supply curve to the left.

2.   Input Prices

3.   Technology

4.   Expectations

5.   Number of Sellers

IV.  Supply and Demand Together

A.   Equilibrium

1.   The point where the supply and demand curves intersect is called the market’s equilibrium.

2.   Definition of equilibrium:

3.   Definition of equilibrium price:

5.   Definition of equilibrium quantity: the quantity supplied and the quantity demanded at the equilibrium price.

6.   If the actual market price is higher than the equilibrium price, there will be a surplus of the good.

a.   Definition of surplus:

b.   To eliminate the surplus, producers will lower the price until the market reaches equilibrium.

7.   If the actual price is lower than the equilibrium price, there will be a shortage of the good.

a.   Definition of shortage:

b.   Sellers will respond to the shortage by raising the price of the good until the market reaches equilibrium.

8.   Definition of the law of supply and demand: the claim that the price of any good adjusts to bring the supply and demand for that good into balance.

B.   Three Steps to Analyzing Changes in Equilibrium

1.   Decide whether the event shifts the supply or demand curve .

2.   Determine the direction in which the curve shifts.

3.   Use the supply-and-demand diagram to see how the shift changes the equilibrium price and quantity.

D.   Shifts in Curves versus Movements along Curves

1.   A shift in the demand curve is called a "change in demand." A shift in the supply curve is called a "change in supply."

I.    Controls on Prices

A.   Definition of price ceiling:

B.   Definition of price floor:

C.   How Price Ceilings Affect Market Outcomes

1.   There are two possible outcomes if a price ceiling is put into place in a market.

a.   If the price ceiling is higher than or equal to the equilibrium price, it is not binding and has no effect on the price or quantity sold.

b.   If the price ceiling is lower than the equilibrium price, the ceiling is a binding constraint and a shortage is created.

2.   If a shortage for a product occurs (and price cannot adjust to eliminate it), a method for rationing the good must develop.

3.   Not all buyers benefit from a price ceiling because some will be unable to purchase the product.

 5.  Case Study: Rent Control in the Short Run and the Long Run

a.   The goal of rent control is to make housing more affordable for the poor.

b.    Rent-controlled apartments are rationed in a number of ways including long waiting lists, discrimination against minorities and families with children, and even under-the-table payments to landlords.

c.   The quality of apartments also suffers due to rent control.

D.   How Price Floors Affect Market Outcomes

1.   There are two possible outcomes if a price floor is put into place in a market.

a.   If the price floor is lower than or equal to the equilibrium price, it is not binding and has no effect on the price or quantity sold.

b.   If the price floor is higher than the equilibrium price, the floor is a binding constraint and a surplus is created.

2.   Case Study: The Minimum Wage

a.   The market for labor looks like any other market: downward-sloping demand, upward-sloping supply, an equilibrium price (called a wage), and an equilibrium quantity of labor hired.

b.   If the minimum wage is above the equilibrium wage in the labor market, a surplus of labor will develop (unemployment).

c.    The minimum wage will be a binding constraint only in markets where equilibrium wages are low.

d.   Thus, the minimum wage will have its greatest impact on the market for teenagers and other unskilled workers.

E.   Evaluating Price Controls

1.   Because most economists feel that markets are usually a good way to organize economic activity, most oppose the use of price ceilings and floors.

a.   Prices balance supply and demand and thus coordinate economic activity.

b.   If prices are set by laws, they obscure the signals that efficiently allocate scarce resources.

2.   Price ceilings and price floors often hurt the people they are intended to help.

a.   Rent controls create a shortage of quality housing and provide disincentives for building maintenance.

b.   Minimum wage laws create higher rates of unemployment for teenage and low skilled workers.is market intervention.